Northrop Pegs Damage From Storms at $1 Billion

Storm-related repairs and delays at Northrop Grumman Corp.’s massive Gulf Coast shipyards will cost the defense contractor $1 billion and shave 2005 earnings by about 9%, the company said Monday.

It was the most detailed assessment yet of the effects of hurricanes Katrina and Rita on Century City-based Northrop Grumman, which builds destroyers and other vessels at yards in New Orleans and the Mississippi cities of Pascagoula and Gulfport.

Although the damage to the facilities was significant, the company “weathered this disaster and will come back even stronger,” Northrop Grumman Chief Executive Ronald Sugar said in a call with analysts.

In the meantime, Northrop Grumman said its estimated 2005 earnings would drop about 40 cents a share, to $3.55 to $3.65 a share, from its previous forecast of $3.90 to $4. Wall Street had expected the company to earn $3.91 a share this year, according to analysts surveyed by Thomson Financial.

Northrop said it would take a charge of 25 to 30 cents a share in the third quarter to reflect the costs, with the balance expected in the fourth quarter of this year.

In response, the company’s stock fell 57 cents, or 1.1%, to $53.48.

The financial hit was “quite a bit higher” than Northrop estimated a month ago before a full assessment of the damage, said Paul Nisbet, a defense analyst with JSA Research Inc. in Newport, R.I.

He noted that on Sept. 8, the company said Katrina would cause work delays that would pare its 2005 earnings by 6 cents to 12 cents a share. But it hadn’t yet calculated the added repair costs to recover from the storm’s damage.

Then Hurricane Rita stormed through the Gulf Coast on Sept. 24, although it caused less damage than Katrina, Sugar said.

Northrop said work delays from both storms would reduce 2005 earnings by 8 cents a share, while the added expenses for repairs would lower profit by an additional 30 cents to 35 cents.

The shipyards together have 19,800 workers, and Northrop is the largest manufacturing employer in both states. About 12,500 of those workers are back on the job and construction has resumed on 11 ships, the company said.

It probably will take nine to 12 months for the company to fully recover, Chief Financial Officer Wesley Bush said. Northrop said it did not change its forecast for 2006, estimating sales of about $32 billion and earnings of $4.10 to $4.30 a share.

Last year, the company reported net income of $1.1 billion, or $3.03 a share. Northrop’s forecast assumes that it won’t receive financial help from its insurers or its main customer, the Pentagon. Both could help keep the company’s actual cash outlay to a minimum.

The company believes it has enough insurance to cover its hurricane-related losses, but said it was having “a disagreement” with one of its insurers over “coverage for certain losses above $500 million.” Northrop declined to elaborate.

Bush also told analysts that the company was “actively consulting” with the U.S. government and other customers about “the need to mitigate the effect of the extraordinary hurricane cost.”

But he said it was “too soon to predict the outcome” of those talks and thus Northrop couldn’t assume any financial relief in its forecast.

In addition to its Gulf Coast yards, Northrop builds aircraft carriers and submarines in Newport News, Va. Shipbuilding overall accounts for about one-fifth of the company’s annual sales.

The hurricanes hit Northrop’s facilities differently. They delivered severe damage to the Pascagoula yard, but its nearby infrastructure -- roads, phone lines, electricity and the like -- came back “fairly quickly,” Bush said.

It was the opposite situation in New Orleans, where Northrop’s facility is known as the Avondale shipyard. The yard “was not nearly as hard-hit,” he said, but the local infrastructure “is not coming back as quickly.”

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A key business

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Shipbuilding is Northrop’s second-biggest business.

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Northrop Grumman’s 2004 sales by division (In billions)

Electronics: $6.4

Ships: $6.3

Information technology: $5.1

Battlefield systems: $5.0

Integrated systems: $4.7

Space systems: $3.3

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Source: Bloomberg News